Benefits and risks of investing in emerging markets ETFs
Emerging markets ETFs can offer investors a variety of benefits.
- Potential for diversification and outperformance: Emerging markets ETFs can outperform when U.S. or other developed markets struggle, particularly during periods of U.S. dollar weakness.
- Access to high-growth companies: These ETFs provide exposure to businesses operating in some of the world's fastest-growing economies, including in sectors such as e-commerce, financial services, manufacturing, and natural resources.
- Long-term demographic tailwinds: Many emerging economies, such as India, benefit from expanding middle-class populations, rising incomes, and growing consumer demand that can support long-term economic growth.
Investors should also keep in mind the risks associated with emerging markets ETFs.
- Higher volatility: Emerging markets are generally more volatile than developed markets due to country-specific risks, such as political instability, corruption, weaker institutions, and changing regulations.
- Government intervention: Investors face the risk of nationalization, capital controls, sanctions, or forced delistings if governments increase their involvement in financial markets or geopolitical tensions escalate.
- Currency risk: Unless an ETF hedges its foreign exchange exposure, fluctuations in local currencies can significantly affect returns. A strengthening U.S. dollar has historically created headwinds for many emerging market investments.
Methodology: How these emerging markets ETFs were chosen
When creating this list, we prioritized low expense ratios, substantial assets under management, strong trading liquidity, and long operating histories. Lower fees help preserve long-term returns, while larger, established ETFs generally offer tighter bid-ask spreads and a lower risk of fund closure.
We also favored broad, market-cap-weighted index funds over more specialized strategies. Market-cap weighting keeps portfolio turnover low, improving tax efficiency while naturally allowing the largest and most successful companies to become a greater part of the portfolio over time, rather than requiring frequent trading.
Finally, we generally preferred unhedged emerging markets ETFs to currency-hedged alternatives. While exchange rates can create short-term volatility, currency movements have historically tended to wash out over long investment horizons, whereas hedging introduces additional costs and can create a persistent performance drag.
